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Depositories and Investors

Category : NISM-Series VI

Depository

A depository can be compared to a bank and holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.

It is a facility for holding securities electronically in which securities transactions are processed by book entry. In addition to the core services of electronic custody and trade settlement services, depositories provide special services like pledge, hypothecation of securities, automatic delivery of securities to clearing corporations, distribution of cash and non-cash corporate benefits (Bonus, Rights, IPOs etc.), stock lending, demat of NSC/KVP, demat of warehouse receipts and various other services.

Depository interfaces with the investors through its agents called Depository Participants (DPs). If an investor wants to avail the services offered by the depository, the investor has to open an account (demat a/c) with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank's services.

Investor in a Demat Environment

Any investor eligible to acquire and hold securities in his/her name can open a demat account with any of the depositories through a registered Depository Participant (DP) of his/her choice. While choosing DP the individual should take into consideration the same factors as service standards, charges and convenience of location etc. as in case of opening a bank account.

Beneficiary owner: The original investor whose securities are held in electronic form by depository is called as ‘Beneficial Owner (BO)’ since all the benefits as a result of the holding the securities are given to the original holder and the demat account opened by the beneficial owner is called as Beneficiary account.

Registered Owner: When securities of a company are held in physical form by an investor, name of the investor is recorded in the books of the company as a ‘Registered Owner’ of the Securities. Each certificate is identified by Folio number, certificate number and distinctive range numbers. But when physical securities are converted in to electronic form, the depository becomes ‘Registered Owner” in the books of the company and investors name is removed from books of the company. Since depository is holding such shares as a custodian or a guardian it cannot claim any benefit or it is not liable for any loss as a result of the holdings.

Some important facts you should know about demat accounts:

Minimum Account Balance: There is no requirement of holding minimum-security balance in a demat account; you can maintain zero balance in your account. Ready availability of account enhances your transaction making ability.

Number of Accounts: Though there is no restriction on number of demat accounts that can be opened by an investor, DPs exercise due diligence before opening such accounts.

Credit Confirmation: In order to receive all the credits coming to demat account automatically, a one-time standing instruction can be given to the DP at the time of opening your account. Otherwise, a receipt instruction has to be given to the DP every time credit is expected in the demat account.

Change of Address: For any change of address, if any, communication to your DP in writing is sufficient. The DP will ensure that the change is incorporated for all securities held in your demat account. You need not write to all the companies separately and this saves money, time and effort for the investor.

Bank Account Details: SEBI has made it mandatory for companies to print details of bank account of the BO on dividend/interest warrants etc. to prevent possibilities of misuse of the warrants. BOs request in writing to the DP if they wish to record/change their bank account details. If the BO opts for ECS facility and such facility is available with the BO’s bank, the dividend/interest gets credited directly to his/her bank account.

Services offered by the Depositories:

The Depository Participant (DP) is the link between the investors, the company (issuer of securities) and the depositories (NSDL/CDSL) and provides the following services:

For receipt of securities into his/her account, a BO can give one time "standing instruction" to DP. Once such a standing instruction is given to the DP, there is no need to submit separate instructions for receipt every time the investor buys securities.

The following types of freeze facility may be availed of by submitting freeze instruction to the DP in the prescribed form:

Account Opening: To utilize the services offered by a depository, any person having investment in any security or intending to invest in securities needs to have a demat account with a DP. The holder of such demat account is called as "Beneficial Owner (BO)". The investor can approach any DP/s of his/her choice to open a demat account.

Dematerialization: Dematerialization is the process by which physical certificates (of shares/debentures/other securities) are converted into electronic balances. A BO has to submit the request for dematerialization by submitting the demat request form (DRF) duly completed along with the concerned physical certificates, to his/her DP.

Delivery & Receipt Instructions: To settle trades done on a stock exchange (on-market trades) and trades which are directly settled between two BOs (off-market trades), BOs submit duly completed delivery instructions in the prescribed form to DP.

Account Statement: Generally a DP sends to the BO, a statement of his account, monthly, if there is any transaction in the account or every quarter if the account is not operated during that period.

Rematerialization: Rematerialization is the process by which the electronic balances held in the demat account can be converted back into physical certificates.

Pledging: If the BO decides to pledge any securities in his BO account, he can do so by submitting the pledge creation form duly completed, to his DP.

Transmission of securities: Depositories facilitate transmission of balances held in BO account/s (to other BO account/s) if so required due to death, lunacy, bankruptcy, insolvency or required due to operation of any law. The process of transmission through the depository is simple and quick as the successor has to interact only with his DP.

Nomination: Individual BOs have a facility for nomination in favour of an individual. If the sole or all the joint holders are deceased, the shares of different companies held in the demat account will be transmitted easily to the demat account of the nominee on submission of the death certificate and transmission form. It may be noted that in the event of the death of one of the joint holders, the securities will be transmitted in the demat account of the surviving holders.

Freeze Facility: A demat a/c holder (beneficiary owner) may freeze securities lying in the account for as long as the account holder wants it. By freezing the account, account holder can prevent unexpected debits or credits or both, creeping into its account.

Freeze for debits only;

Freeze for debits as well as credits;

Freeze a particular ISIN in the account;

Freeze a specific number of securities held under an ISIN in an account.

Other miscellaneous services: Apart from these above mentioned services, an investor enjoys many other facilities provided by depositories, such as - facilitating repurchase/ redemption of units of mutual funds; pledging/hypothecation of dematerialized securities against loan; holding debt instruments in the same account, availing stock lending/borrowing facility, etc.

Benefits of participating in demat environment:

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. As an investor you enjoy many benefits if you open a demat account and maintain securities in electronic form. Some of the benefits are:

Having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered. This process usually takes around 3 to 4 months and is rarely completed within the statutory framework of 2 months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss in transit.

Faster settlement cycle: The settlement cycle follow rolling settlement on T+2 basis i.e. the settlement of trades will be on the 2nd working day from the trade day. This enabled faster turnover of stock and more liquidity with the investor.

Elimination of bad deliveries: In the depository environment, once holdings of an investor are dematerialized, the question of bad delivery does not arise i.e. they cannot be held "under objection". In the physical environment, buyer was required to take the risk of transfer and face uncertainty of the quality of assets purchased. In a depository environment good money certainly begets good quality of assets.

Elimination of risks associated with physical certificates: Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, and loss of certificates during movements through and from the registrars, thus exposing the investor to the cost of obtaining duplicate certificates etc. This problem does not arise in the depository environment.

No stamp duty: Transfer of any kind of securities in the depository environment is free from stamp duty and this waiver extends to equity shares, debt instruments and units of mutual funds.

Immediate transfer and registration of securities: In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the companys registrar for registration.

Reduction in brokerage: Brokers provide this benefit to investors as dealing in demat securities reduces their back office cost of handling paperwork involved in transfer of securities.

Periodic holding report: Periodic status reports to investors on their holdings and transactions, leading to better controls.

Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demat securities on behalf of a minor.

Ease in portfolio monitoring: Since statement of account gives a consolidated position of investments in all instruments, it’s easy to monitor and strategize entire portfolio.

Safety measures in Demat Environment:

There are various checks and measures in the depository system to ensure safety of the investor’s holdings. These include:

A DP can be operational only after registration with SEBI, which is based on their independent evaluation and the recommendation from any one of the depository. SEBI has prescribed criteria for becoming a DP in the regulations.

DPs are allowed to effect any debit and credit to an account only on the basis of valid instruction from the client.

There are periodic inspections into the activities of both DP and R&T agent.

All investors have a right to receive their a/c statement periodically from the DP.

In the demat environment, depository holds the investor accounts on trust. Therefore, if the DP goes bankrupt the creditors of the DP will have no access to the holdings in the name of the clients of the DP. These investors can transfer their holdings to an account held with another DP.